U.S. hiring may be rebounding, but wage growth is not

July 7, 2014

AThe U.S. job market has finally turned a corner. What is remarkable is that it has taken so long.

Companies have finally begun taking on staff in consistently greater numbers, half a decade after the end of a deep recession brought on by one of the most punishing financial crises in history.

What companies haven’t been doing yet is offering consistently greater pay.

That means an urge to start bringing forward expectations for when the U.S. Federal Reserve will begin raising interest rates might be premature.

Right now, the consensus view is that the federal funds rate will go up in about a year. Some banks who thought it might be late next year are saying it might come a bit earlier.

In the meantime, there is still plenty of slack in the job market. Many of the positions being created are part-time, with plenty of evidence of people wanting full-time work having to juggle multiple part-time jobs.

As this chart shows, the U.S. job market still looks to be far as far out of joint with growth, inflation and rates as it has been in half a century.


Like many of its peers, inflation in the U.S. has languished at very low levels for many years. Recently it moved up to 2.1 percent. The Fed’s preferred Personal Consumption Expenditure index measure also has risen a bit to 1.8 percent.

But pay growth remains weak.

So apart from the assumption that in past recoveries, more hiring eventually triggered higher pay so it must do so again, there are no clear signs that the job market is likely to contribute to spiraling inflation any time soon.

What has moved up a lot more than pay is the stock market, along with all sorts of asset prices to record highs around the globe, lifted by an unprecedented tide of central bank liquidity since the financial crisis began six years ago.

While the connection between quantitative easing and job creation is hotly debated and very hard to measure, the effect of free money on stock markets is clear.

And investors are getting used to it.

Volatility has plunged to its lowest since the fearful calm of 2007 before the financial crisis tore apart markets, triggered the Great Recession, and then later, brought the euro zone to within a hair’s breadth of breaking up.

The U.S. stock market, as it was then, is now at a record high, only this time it’s higher. Many are worried, especially given there hasn’t been a major pullback on Wall Street for years, that it’s nearing time for a correction.

All of that suggests a greater risk of disinflation than a dangerous spike in consumer prices pressured by higher wage deals as more Americans find jobs.

Lena Komileva, chief economist at G+ Economics, says:

The U.S. labour cycle has lagged substantially behind the business, Fed and financial vectors of this recovery cycle. It is unsurprising that the fed funds rate and now (the Fed’s) forward guidance have decoupled from the unemployment rate.

More than ever, it is a mistake to use past performance to predict future results. It is increasingly clear that the trillions of dollars of cash now flowing in the system after the collapse of a super-inflated U.S. housing market jacked up on sub-prime lending, along with the implosion of Lehman Brothers and the financial chaos that ensued, means that pretty much anything that happened before should not necessarily be used as a guide.

But the fact there is no major sign of wage pressure from any of the world’s developed economies yet should probably give anyone reason to stop and think before ramping up expectations that central banks, certainly one still printing tens of billions of dollars a month of new money to stimulate the economy, are on the verge of jacking up interest rates.

Markets and forecasters are falling into a similar trap in Britain, where the job market is growing rapidly but there have been very few signs, at least in official statistics, of any meaningful pickup in wage inflation that might drive consumer inflation higher rather than lag it. And the Bank of England has made clear it is watching wage deals very closely.

The euro zone is still grappling with much lower inflation, and about double the rate of U.S. unemployment. Its stock markets, too, are near record highs and sovereign bond yields are stretching the limits of what any investor before the financial crisis would have called a rate of return.

But recent policy errors by the European Central Bank, which raised rates prematurely just before the financial crisis in 2008 and then again in 2011 in response to a rise in inflation, ought to give reason for pause.

Just a few years down the line, and after a full reversal of those moves, the euro zone is struggling to get inflation to come back from the danger zone.

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